North Carolina Business Litigation Lawyer & Attorney : Mack Sperling : Brooks Pierce Law Firm : Greensboro, Raleigh, Winston-Salem, Charlotte

Today, the North Carolina Court of Appeals allowed a plaintiff to proceed with her lawsuit that "litigation funding," the practice by which private firms make advances to plaintiffs involved in litigation in exchange for a substantial return in the event of a successful result, violates the law of North Carolina. Reversing the trial court, the Court of Appeals let stand claims for usury, unfair and deceptive practices, and a violation of the North Carolina Consumer Finance Act. The Court threw out, however, claims that this practice constitutes "unlawful gaming" and champerty. 

In the case of Odell v. Legal Bucks, LLC, the litigation funder had advanced Ms. Odell $3,000 for her motor vehicle accident claim.  Ms. Odell ultimately settled her claim for $18,000, but found that the terms of her agreement required her to pay Legal Bucks $9,582, or more than triple the advance that she had received. Ms. Odell, certainly unhappy at having to give up more than half of her recovery, then sued Legal Bucks, seeking class certification on her multiple claims.

The principal argument of Legal Bucks against the usury claim was that Ms. Odell was not under an absolute obligation to repay the money she had been advanced, and that the arrangement between them was therefore not usurious.  The Court recognized that the litigation funding was not a "loan," because a "loan" carries the requirement of an unconditional obligation to repay principal, but held that N.C. Gen. Stat. §24-1.1 also covers "advances," which do not have the same requirement. The Court found that the agreement between the parties demonstrated an understanding that the principal of the advance would be returned, meeting a key element of the test for usury. The Court further found that there was no dispute "that the rate of interest provided for in the Agreement substantially exceeds that permitted" by the statute, and that Legal Bucks had "intentionally entered into a contract to receive a greater amount of interest that that allowed" by law.

Since Legal Bucks wasn't licensed under the Consumer Finance Act, that made out a violation of the Act, as did its violation of the usury statute. The unfair and deceptive practices claim also went forward, over Legal Bucks' objection that the terms of the agreement had been fully disclosed to the plaintiff. The Court held that:

 "violations of statutes designed to protect the consuming public and violations of established public policy may constitute unfair and deceptive trade practices." In this regard, we note that it is a "paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws." N.C. Gen. Stat. § 24-2.1 (2003). [The] [d]efendants' practice of offering usurious loans was a clear violation of this policy.

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Moody v. Sears, Roebuck & Co., 2008 NCBC 14 (N.C. Super. Ct. August 6, 2008)

The North Carolina Business Court has set out an explicit set of procedures to be followed when parties take a voluntary dismissal of a class action before a decision on class certification. 

This Order yesterday by Judge Tennille in the Moody case comes following the Court of Appeals decision in that case last month, which reversed the Business Court and held that full faith and credit should have been accorded to an Illinois court's approval of a nationwide class action.

The new opinion from the Business Court requires that counsel taking a pre-certification dismissal of a class action must file a statement which includes:

(1) the reason for dismissal, (2) the personal gain received by the plaintiffs in any settlement, (3) a statement of any other material terms of the settlement, specifically including any terms which have the potential to impact class members, (4) a statement of any counsel fees paid to plaintiff’s counsel by defendants, and (5) a statement of any agreement by plaintiff(s) restricting their ability to file other litigation against any defendant. 

Op. at ¶2.  In addition, counsel for the Plaintiff is required to "file a statement either detailing any potential prejudice to putative class members or representing to the Court that no prejudice exists."  Judge Tennille indicated that the Court would "be particularly concerned about issues related to tolling of the statute of limitations."

In a case involving the dismissal of a North Carolina class action resulting from the approval of a nationwide class action settlement in another state, which was the situation in Moody, there is a different requirement.  Then:

counsel shall file with the Court a copy of the order approving settlement and sufficient information concerning the notice provisions so that the Court can ascertain if jurisdictional and due process issues have been addressed by the foreign court and whether North Carolina citizens have been represented in the proceeding. 

Op. at ¶4.  Judge Tennille indicated that this filing would permit the court to "raise any concerns with the foreign court," and that "once those concerns have been addressed, the foreign court’s order will be entitled to full faith and credit whether or not this Court would have granted approval of the settlement."  Op. at ¶4.  (It doesn't appear that in a case involving an out-of-North Carolina settlement that the statement regarding the reasons for the dismissal is necessary.)

In all cases, the Business Court will require a final accounting of the distribution of any settlement proceeds and attorneys fees.  This is not a new requirement of the Court.  As Judge Tennille stated, "it has been the practice of this Court to require class representatives to file and publish a copy of the final accounting detailing the amount of money (or coupons) actually received by the class, the amount of administrative fees, and the amount of attorney fees received."  Op. at ¶6.

The Court noted two reasons for the requirement of an accounting.  First, the Court said that this would "promote greater transparency that will fill the 'informational black hole' concerning final distributions and make administration of class actions more efficient and effective and thus more beneficial to class members."  Op. at ¶8.

Second, the Court said it would use this information for other purposes, including an assessment of the qualifications of class counsel:

This Court would add to that list of benefits from transparency, the benefit of judges being able to assess the past performance, abilities and commitment of those lawyers who seek to be class counsel in other cases. A history of final results in other cases would also alert judges to scrutinize settlements proposed by defendants who have settled their class action in ways that resulted in no benefits to class members. This Court can think of no reason why the final results should not be made known to the Court and the citizens affected. 

Op. at ¶9.  The accounting information will be available on the Business Court's website. 

The accounting in Moody is that the members of the class in North Carolina received $66 in cash and coupons, the nationwide class members received $2,402 in cash and coupons, and Plaintiff's counsel received $1,100,000 in cash and coupons.  Notwithstanding its reversal of the Business Court's opinion of the original decision in Moody (which you can read about here) the Court of Appeals expressed concern about the adequacy and fairness of the Illinois settlement, stating "we share the trial court's serious concerns regarding the final accounting in the . . . settlement."

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On August 5th, in Hamm v. Blue Cross and Blue Shield of North Carolina, Judge Jolly certified a class action against health insurer Blue Cross.  The class will consist of Blue Cross members who claim that their medical providers charged them more than the amount the providers had contracted with Blue Cross to charge for their services, after the members exceeded certain benefit maximums.  According to Plaintiff's Brief (at bottom), the class will have thousands of members.

The Court rejected a number of arguments made by Blue Cross as to why a proper class did not exist and why the class representative would not adequately represent the class.

Hamm was enrolled in a plan with Blue Cross that provided for "in-network providers" to charge a contracted-for amount for their services, referred to as the "allowed amount."  Hamm's contention was that the plan provided that Hamm would not be responsible for any charge over the allowed amount.

In Hamm's situation, however, she hit the "benefit period maximums," which included a cap on the dollar amount that a member could receive in paid benefits from Blue Cross for certain services.  She claimed that the in-network providers then began charging her at full rates, not the lower, negotiated-for allowed amount.  Hamm disputed that the plan permitted these additional charges, which led to her lawsuit.

The main arguments against class certification made by Blue Cross, and rejected by Judge Jolly, were as follows:

Blue Cross argued that the class had no injury.  As the insurer interpreted its agreement, in-network providers were entitled contractually to charge more than the allowed amount when a member exceeded the number of visits allowed by her policy (the "visit maximum").  But when a member exceeded the monetary amount that Blue Cross would pay for covered services (the "benefit maximum"), as opposed to the visit maximum, Blue Cross said that a provider was required to charge only the allowed amount, and it disputed that it had allowed the practice of a higher charge in those circumstances.  The Court wrote that there was "pragmatic appeal" to this argument (Op. at 12 n.8), but said that the construction of the contract was "not as clear to the court as it is to Defendant," and found these were both "merit-based defense(s) not properly before the court at this stage. . . ."  (Op. at 11 and 12). 

The insurer also argued that a member would have no claim unless he or she had actually paid an amount over and above the allowed amount.  The Court rejected this argument, stating that a class member would have at least a claim for nominal damages for a breach of the contract, and noting that Plaintiff sought a declaration regarding the future rights of the class members, which would not require a showing of any actual damages.

Blue Cross argued that the Court would have to make "extensive individualized inquiries" whether a class member had actually paid more than the allowed amount and whether administrative remedies had been exhausted.  The Court held that these inquiries did not predominate over the common liability issue.  It said that there would be "uniform, mechanized and documented evidence" of these matters given the nature of Blue Cross' record-keeping.  (Op. at 12 n.9).

On the point of adequacy, Blue Cross argued that the Plaintiff was subject to unique defenses regarding the amounts she claimed to have been charged over the allowed amount.  Blue Cross contended that the only charges to Plaintiff over the allowed amount had come from an out-of-network provider, not an in-network provider, and that the services received were not a "covered service."  The Court disagreed that these arguments precluded class certification, stating that "the focus of class certification 'is properly on the typicality of the plaintiff's claim as it applies to the general liability issues [and] not on the plaintiff's ultimate ability to recover.'"  (Op. at 15).

The Court concluded its analysis by ruling that a class action was a superior method for adjudicating the claims before it.  It held "the controversy is over a contract of insurance that is standardized over hundreds of thousands of North Carolinians.  The interpretation of such standardized agreement on a class-wide basis will provide certainty and prevent inconsistent adjudications."

My partners Jennifer Van Zant and Charles Marshall represent Blue Cross.

Brief in Support of Motion for Class Certification

(All other briefs were filed under seal)

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Today, in Moody v. Sears Roebuck & Co., the North Carolina Court of Appeals reversed a decision of the Business Court which had refused to approve the dismissal with prejudice of a North Carolina class action.  The Business Court had found that the settlement of the case, even though it had been approved by an Illinois court, was inadequate for the North Carolina class members. 

This is an interesting case (and a long post), but the Reader's Digest version is that: (a) Rule 23 of the North Carolina Rules of Civil Procedure doesn't require court approval before a class action which has not yet been certified is dismissed, but (b) a court nevertheless has the authority to conduct a review of a pre-certification dismissal and should exercise it, and (c) a court's review of a foreign court's approval of a class action settlement is limited to a consideration of whether the foreign court addressed issues of jurisdiction and due process.

The core of Judge Tennille's May 2007 opinion in the Business Court (summarized here) was that there was a "shocking incongruity between the class benefit [of about $2400 to the entire nationwide class] and the fees afforded counsel and the representative [of more than $1 million]."  He held that this "leave[s] the appearance of collusion and cannot help but tarnish the public perception of the legal profession."

The class notice and claims process agreed to by Moody and Sears also came under Judge Tennille's fire.  He held that the class notice was poorly distributed and uninformative, did not provide sufficient time for class members to opt out, and made no mention of the million dollar fee for the lawyers. He held that "it is hard to imagine a more inadequate notice plan and claims process."

The effect of the ruling was that Judge Tennille refused to allow the class plaintiff to dismiss its North Carolina class claims with prejudice, even though Sears had joined in the motion.  Judge Tennille allowed the dismissal of the class claims without prejudice. 

The class plaintiff and his adversary then both appealed Judge Tennille's decision. So, the Court of Appeals was faced with the curious situation of Appellant and Appellee both arguing that the lower court was wrong. 

Each side filed its own brief, and each side filed a response to the other's brief. There was an Appellant's Brief from Plaintiff which said that Judge Tennille's order was "bizarre and unbelievable" (on p. 17), an Appellant's Brief from Sears saying that the Order was "astonishing" (on p. 12); and an Appellee's Brief from Plaintiff and an Appellee's Brief from Sears also urging reversal. So, in the end, the Court had four briefs saying how very wrong the Business Court had been.

A pivotal issue was whether Judge Tennille's approval was even required for the dismissal to be taken.  The Business Court had held in a number of cases, including Moody, that when a claim is made on behalf of a class, court approval is required before any dismissal, even if the class hasn't yet been certified.  Moody presented the first opportunity for the Court of Appeals to deal with that issue, and it rejected the argument that the North Carolina Rules of Civil Procedure require approval before a pre-certification dismissal.

The Court further held, however, that "our holding does not imply that a trial court wholly lacks authority to review a motion for pre-certification dismissal of a class-action complaint."  The Court observed that "[w]ithout some level of pre-certification court supervision, there is an unacceptable risk that parties may abuse the class-action mechanism in myriad ways."  It set out the following standard:

We therefore hold that when a plaintiff seeks voluntary dismissal of a pre-certification class-action complaint, the trial court should engage in a limited inquiry to determine (a) whether the parties have abused the class-action mechanism for personal gain, and (b) whether dismissal will prejudice absent putative class members. If the trial court finds that neither of these concerns are present, the plaintiff is entitled to a voluntary dismissal. However, if the trial court finds that one or both of these concerns are present, it retains discretion to address the issues.

The inquiry is narrower, however, when a foreign court, like the Illinois court which had approved the settlement questioned by Judge Tennille, has already addressed these issues.  The issue, then, the Court determined, is one of full faith and credit. The Court of Appeals observed that the due process and jurisdictional issues considered by the Business Court had been "heard and answered" in the Illinois Court.  [The Illinois Judge had received a letter from Judge Tennille raising his concerns about the settlement and had inquired into those matters at a fairness hearing.]

The Court of Appeals held that any review of the approval of a class action by the courts of another state was "limited" to a consideration of whether jurisdictional and due process issues had been addressed by the foregin court.  It stated:

limited review serves important judicial interests in the efficiency and finality of class-action litigation, and ensures that no "waste of judicial resources" occurs by reason of "reviewing courts . . . conduct[ing] an extensive substantive review when one has already been undertaken in a sister state." Further, "second-guessing the fully[-]litigated decisions of our sister courts would violate the spirit of full faith and credit," and could make North Carolina the jurisdiction of choice for plaintiffs wishing to launch collateral challenges to other states' judicial proceedings. While North Carolina courts surely have an important interest in not enforcing constitutionally infirm foreign judgments, the appropriate manner of correcting foreign trial court errors is "by appeal within the [foreign] state system and by direct review in the United States Supreme Court."

The Court of Appeals concluded that "the jurisdictional and due process conclusions contained in the trial court's 7 May 2007 order were 'fully and fairly litigated and finally decided' in Illinois Circuit Court," and that "[t]his finding concludes our review and forecloses any reconsideration of the merits of the legal issues decided by the Illinois Circuit Court. . . .While we share the trial court's serious concerns regarding the final accounting in the . . . settlement, we are constrained to hold that the trial court erred by refusing to accord full faith and credit to the . . . settlement. We therefore reverse the trial court's 7 May 2007 order and remand this case to the trial court with instructions to dismiss the class-action allegations with prejudice."

The Business Court's opinion had gotten a lot of attention.  The Rand Institute for Civil Justice had called it "fascinating," and a Harvard Law School Professor who writes frequently about class actions had applauded it.

Despite the reversal, the Business Court opinion in Moody remains significant for other reasons.  It is a primer from Judge Tennille's perspective on what are acceptable class action settlements and notice procedures and certainly worth reading before presenting a settlement for approval in his court.

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